The age of global crisis.by R.Ziemba

Roubini Global Economics

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Roubini Global Economics


By Rachel Ziemba, Director of Emerging Europe and Global Macro

© Roubini Global Economics Copyright 2011No reproducing or redistribution without written consent.

• Global outlook has darkened especially in Europe, with recession risks high

• Downside risks for Black Sea Region in near term, undermining long-term growth prospects. – Financing strains could put pressure on currencies and banks– Global weaknesses will exacerbate any domestic

vulnerabilities, especially for Ukraine, Romania– But policy space remains constrained.

• Policy Response– Use policy space available to improve balance sheets– Infrastructure and Institutions to support intra-regional trade– Improve Balance sheets

2

Global Headwinds For the Black Sea Region


3

Global Story: Private Debt Crisis to Public Burden


U.S., U.K., Japan Baseline/Adverse Debt Paths

EZ PIIGS—Explosive Baseline/Shock Debt Paths

Source: IMF and RGE Calculations Note: Baseline is the IMF WEO Projection; Adverse Scenarios are RGE 1-standard deviation shocks to GDP growth and interest rates over the last decade—a relatively benign PIIGS scenario

• Sovereign credit risk will stay sky high in the EZ PIIGS, keeping the world on the edge of crisis given the threat of disorderly default or EZ break-up

• Heavy public debt burdens in the United States, United Kingdom and Japan will weigh on recovery, but should not threaten collapse; all can monetize public debt

• This will draw attention also to the EM countries that have weaker balance sheets

4

Global Story: Too Much Debt in Advanced Economies


EZ/U.K. Warning Signals Flash Amber/Red, Less So in the United StatesUS Japan UK Canada EZ Belgium France Germany Greece Ireland Italy Portugal Spain

Government Gross Debt, 2011 100 229 83 84 87 97 88 80 152 114 120 91 64

Government Net Debt, 2011 72 128 75 35 67 82 78 55n.a. 95 101 86 53

Primary Balance, 2011 -9 -8.6 -5.5 -4.1 -1.7 -0.5 -3.5 -0.3 -0.9 -7.5 0.2 -1.6 -4.6

Households Gross Debt 91 74 107 93 72 55 69 62 68 129 50 103 90

Households Net Debt -230 -231 -184n.a. -129 -204 -131 -130 -56 -60 -178 -126 -74

Nonfinancial Corporates Gross Debt 76 138 128n.a. 142 161 157 69 71 278 119 154 205

Nonfinancial Corporates Debt over Equity (percent) 105 176 89 72 106 43 76 105 218 113 135 145 152

Financial Institutions Gross Debt 97 188 735n.a. 148 139 148 95 21 664 99 65 113

Bank Leverage 13 23 24 18 26 30 26 32 17 18 20 17 19

Bank Claims on Public Sector 8 76 7 20n.a. 22 19 25 27 28 32 16 22Total Economy Gross External Liabilities 144 64 696 91 174 417 254 181 194 1,598 153 293 215

Total Economy Net External Liabilities 19 -55 14 7 13 -43 11 -39 99 102 20 106 90

Government Debt Held Abroad 32 7 27 20 29 68 64 53 61 59 47 57 50

Bank Leverage (Tier 1) 9 21 20 18n.a. 21 23 22 17 20 11 16 16

Source: IMF; RGE

• Debt-led growth is a symptom of structural barriers to sustainable, balanced growth

• [Excessive] Debt brings forward [too much] activity; will be followed by low growth

• EZ/U.K. problems run deeper and wider than U.S., but all face severe challenges

• There are no quick fixes; the only way forward is to commit to debt relief upfront, and structural and fiscal adjustment later, to reduce risk of depression / stagnation now

Global Scenarios—No Way to escap adjustment Costs

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Present to End of 2011 2012

DMs are at stall speed, while EMs are

growing near potential. DMs face a risk of

falling into recession in 2011.

DMs fall into recession, likely in late

2011 or early 2012. Triggers include a financial crisis

following disorderly default(s) in the EZ or policy

mistakes (lack of or insufficient timely support).

The growth environment is volatile, but DMs avoid

technical recession (though not growth recession) and EMs keep growing around

potential.

2013-15

A weak, U-shaped recovery continues, with volatile

growth in DMs (amid balance-sheet repair and

possible EZ uncertainty) and EMs growing near potential. China's broken investment-

led growth model gives out. Gradual rebalancing ensues.

A deep recession takes hold of DMs and possibly globally, requiring an

aggressive, coordinated policy response.

~55%

~45%

Probability

Adequate policy support (QE and fiscal stimulus across DMs and possibly some EMs) staves off the failure of systemic institutions.

The policy response is inadequate (no QE or too-little, too-late QE; lack of adequate fiscal stimulus and possible fiscal drag).

Probability

60%

40%

Policy Response

Global Growth: DM Recession, EM Slowdown


Based on IMF PPP Weights for 2011 and 2012

6

Growth Inflation

2011 2012 2011 2012

U.S. 1.5 0.7 3.1 2.3

EZ 1.6 0.8 2.5 1.8

Japan -0.7 2.0 0.1 0.1

G7 1.3 1.0 2.6 1.9

Advanced Economies ₁ 1.3 1.1 2.6 1.9

Emerging and Frontier Markets 6.3 5.7 6.5 5.2

Asia/Pacific ₂ 5.9 6.1 4.8 3.5

Emerging Asia ₃ 7.5 7.0 5.9 4.2

Latin America ₅ 4.5 3.5 8.9 7.8

Emerging Europe ₆ 4.6 3.3 6.6 6.0

Middle East and Africa ₇ 3.4 3.0 6.2 6.1

BRIC 7.5 7.1 6.6 4.9

World 3.7 3.3 4.5 3.51. U.S., Canada, Japan, UK, Eurozone, Sweden, Norway, Australia, Switzerland

2. Japan, Australia, China, India, Hong Kong, Indonesia, Malaysia, Philippines, Singapore, Vietnam, South Korea, Taiwan, Thailand

3. Asia/Pacific ex-Japan and Australia

4. Hong Kong, Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand, Vietnam

5. Brazil, Argentina, Mexico, Chile, Peru, Colombia, Venezuela

6. Czech Republic, Hungary, Poland, Turkey, Russia

7. Israel, Egypt, Saudi Arabia, United Arab Emirates, South Africa

• Policy responses moving too slow in Europe-> and economic indicators highlight rising risk of recession or at best stagnation.

• A disorderly default could add to financing strains – The chance of a Greek exit in next 12 months is growing

• US too will barely grow, as underlying debt issues have not been addressed.

• EM too will be affected through trade and financing channels.

• EMEA most exposed due to trade links and weaker balance sheets – still recovering from past credit/asset booms.

• Some good news -Inflation has eased from early 2011, helped by good harvests and modest increases in oil supply.

7

Risks Are to the Downside


8

EM Consumption Can’t Pick Up the Slack Yet


0

2 000

4 000

6 000

8 000

10 000

12 000

US Europe Japan Key EM

Private consumption, annualized, 2010

Note: “Europe” includes EZ and UK; “Key EM” includes BRICS plus Indonesia and TurkeySource: IMF, national statistical agencies, RGE

• DM balance-sheet repair will subtract from aggregate demand• Negative wealth

effects, forced deleveraging , fiscal consolidation all contribute to adverse feedback loops

• EM consumption cannot lift the world economy: • Most of EM has substantial

consumption shares in GDP levels and growth

• China remains export- and investment-led, and is unable to change this model fast

Nominal Consumption, USD billion

9

Emerging Europe Growth Slowing Down


85

90

95

100

105

110

115

Hungary Russia South Africa Poland Czech Republic

Growth Falling or Staying Below Trend

OECD Leading Indicators Points to Stall/Recession

Inflation Moderating too, Giving More Policy Space for some

Growth

2011 2012

Hungary 1.8 1.1

Poland 3.9 2.7

Turkey 7.6 3.3

Romania 1.5 1.3

Russia 4.1 3.9

Eurozone 1.6 0.8

Germany 2.9 1.2

US 1.5 0.7

China 9.1 8.3

EM 6.32 5.7

• Tepid recovery has prevented more of an improvement in regional balance sheets.

• Eurozone supported regional recovery, especially Czech R and other countries shifted to exports as primary growth driver.

• New Trading partner - Countries are also trading more with China (especially commodities)

• Many economies (Hungary, Romania, Ukraine Baltics) had to begin fiscal austerity, weakening domestic demand and overall growth.

• Turkey has seen the size of its external deficit grow, credit growth soar, and now has less policy space than in 2008.

• Romania, Bulgaria and others remain constrained by high levels of FX lending and debt service which adds to weak domestic demand and bank balance sheets.

10

EM Europe: Balance Sheet Vulnerabilities


11

Balance Sheet Repair Is Underway


External Debt (%GDP) External Deficits Forced to Improve

Hefty FX debt burden in Bulgaria, Romania Loan to Deposit Ratios Starting to ImproveDomestic FX loans (latest)

(% GDP)% FX credit

in total lending /2

Total pvt sector

of which

Corp. HH

Bulgaria44.7 34.7 10.0 61.9

Georgia20.2 … … 74.3

Romania24.9 12.4 12.5 62.5

Russia 9.1 8.3 0.7 20.3Turkey 14.9 … … 27.8

Ukraine31.8 19.1 12.7 46.3

• EMEA balance sheets still weaker than Asia/Latam. • FX mismatches increasing vulnerability to FX

depreciation. • Much less maturity mismatches than in 2008. • Inflation is easing -> but limited space for CBs to cut• Wide fiscal deficits, limit space for stimulus• Multilateral institutions could provide support• CBs still have cushions but are starting to run out of

reserves ammunition. • Other EM stimulus (china) will keep commodity

demand from plunging

12

How Much Policy Space


• Chance of boosting yields through agriculture. Population growth will put pressure on agricultural commodities which will outperform.

• Space for infrastructure, technology transfer

• Convergence/catch up with advanced economies

• Greater intra-regional trade

• Improving macro/institutional frameworks.

13

Long-term positives


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The age of global crisis.by R.Ziemba

Economy & Finance

Transcript of The age of global crisis.by R.Ziemba